A year after Dalton Investments urged Shinsei Bank to buy back shares and link management’s pay more to the stock price, the US hedge fund is taking its pressure on the Japanese lender to the next level: a proxy fight.
Dalton, run by Jamie Rosenwald, is proposing that Shinsei pays executive directors in restricted stock, so that they have more incentive to improve performance and deliver returns to shareholders, according to a copy of a shareholder proposal provided by Dalton to Bloomberg. Shinsei shareholders will vote on this recommendation at the annual general meeting scheduled for June 20.
The $3.8bn hedge fund has been pushing Shinsei for more than a year to implement changes that would align management and shareholders’ interests while boosting share prices. Rosenwald, a value investor who has owned Japanese equities since 1972, has invested more than half of his firm’s assets in Japan.
In March 2017, Dalton sent a letter to Shinsei calling on the bank to buy back ¥200bn ($1.8bn) of shares. This time around, Dalton had originally planned to urge the Japanese lender to change its articles of incorporation so that shareholders, not the board, could decide on share buybacks. That would be a first step toward Dalton’s goal: getting Shinsei to pay 90% of profit to shareholders every year until its shares trade above book value.
But the hedge fund decided not to go through with that this year after some steps from Shinsei that it viewed as positive, Dalton said, pointing to the lender’s revitalisation plan published this March. In that document, Shinsei said it aimed to improve and maintain total shareholder returns at the general level of other Japanese banks.
“Management had felt it would be unproductive this year,” Rosenwald said of the withdrawn proposal to change the by-laws. “We agreed to give them a year to see if they will walk the walk after talking the talk.”
In a sense, Shinsei has already responded to Dalton’s demands on management compensation. Last week, the Tokyo-based lender announced its own suggestion – also to be voted on at the AGM – to introduce restricted stock for full-time directors excluding outside board members. But while Dalton called for a total payment of as much ¥200mn per year, Shinsei suggests an annual maximum of ¥20mn.
Rosenwald says it’s “no coincidence” that Shinsei took that step after his firm made its proposal, and that the payment suggested by the bank isn’t enough. Dalton has no plan to withdraw its own item from the AGM agenda, he said.
Shinsei has received the shareholder proposal from Dalton, said Shizuyo Eguchi, a spokeswoman for the lender.
“The board had already been discussing this,” Eguchi said of Shinsei’s decision to submit its own proposal on issuing restricted stock to directors, denying that it was a response to Dalton’s move. “We decided to add this to the agenda for the AGM because we had completed the preparations to do so.”
Shinsei has one of the lowest dividend payout ratios of 81 Japanese lenders tracked by Bloomberg, at 5.1% versus an average of 23% last fiscal year. The stock has fallen 17% in the past 12 months, while the benchmark Topix index gained 16%. Shinsei trades at about half its book value.
While Dalton is focusing on management incentives at this year’s AGM, the main prize is still to boost shareholder returns. Rosenwald says Dalton usually holds investments for five to seven years, and that will be no different for Shinsei.
“The stock price of the bank is significantly undervalued despite the excellent business portfolio and abundant capital base,” Dalton wrote in its original proposal on shareholder returns. “We have been suggesting a policy of allocating 90% of net income to share buyback as long as the stock price remains below the net asset value.”
Efforts to encourage better returns at Shinsei may put Dalton directly at odds with a powerful Shinsei shareholder: the Japanese government. The state had a 17% stake in the company according to filings last year, some of which dates back to when Shinsei’s predecessor, Long-Term Credit Bank of Japan, was rescued in the late 1990s.
The headquarters of Shinsei Bank in Tokyo. Dalton Investments has been pushing Shinsei for more than a year to implement changes that would align management and shareholders’ interests while boosting share prices.
